529 Plans are heavily marketed to consumers as a way to save for college. Unfortunately, they are not all they are cracked up to be. While it true that the money in a 529 plan grows tax deferred and may be withdrawn tax free, there are many disadvantages.
- 529 plans count directly against your aid package. This means that any funds you have saved inside one of the these plans will count as either the parent’s or the student’s asset, depending on whose name it is in. Parent’s assets are counted at 6.5% per year and student’s assets are counted at 20% per year. In other words, if you would have qualified for $10,000 in aid but have $50,000 in a 529 plan, you will lose approximately $3,250 per year in financial aid.
- 529 plans offer very limited investment choices.
- Money in a 529 plan must be used for education purposes or there is a tax penalty. If your student decides to start a business and postpone school, the funds in the 529 plan may prove to be a burden from a tax standpoint.
copyright@2106 David Disraeli